A year marred by inflation

Prime Minister Manmohan Singh, while addressing reporters in New Delhi to mark the completion of one year in office of the second UPA government, was overtly cautious. His answers were brief and he did not make any tall claims about the government’s performance.

"I believe that the record of our first year of UPA-II is a record of reasonable achievement. I am the first person to admit that we could have done more," the Prime Minister told reporters in his first national press conference since the UPA was re-elected in May last year.

What made the Prime Minister take such a cautious if not critical path while talking about his own government? Perhaps, the first question he faced at the conference could clarify this. “Why is the Prime Minister, himself a well-known economist, not able to manage the country’s food economy properly?” asked a journalist opening the press conference.

One year into the second UPA government, this could well be the core question or challenge the ruling coalition faces. Despite the government’s achievements on maintaining high economic growth, it failed miserably to contain high prices. The Prime Minister knows price rice is a highly sensitive issue in a poor country like India. So he blamed international factors for the problems in the domestic economy and repeated the government’s view that the prices are falling and inflation would be contained by year-end.

Growth without Equity?

The UPA was re-elected in 2009 May at a time when the country was still under the clouds of the worst economic crisis in decades. The country’s financial industry was battered by the global crisis and the economy was slowing down. The growth rate fell sharply from around 9 percent to 6.7 percent in 2008-09. Most of the advanced economies were still in recession.

The main promise of the UPA was growth with equity, or simply put, “inclusive growth”. Finance Minister Pranab Mukherjee presented the first budget of the UPA-II by giving importance to public spending and domestic demand. The Reserve Bank of India (RBI) cut down key interest rates to ensure credit flow did not get hit. These combined efforts by the government as well as the apex bank, meant to take the economy back to the growth track, seem to have paid off.

The economy, as the key government officials predicted, fast returned to high growth rates even as the equity markets returned to healthy levels. Against an IMF forecast of only 5.1 percent GDP growth in 2009, actual growth was 7.2 percent, despite a major drought. The Sensex rose from 14,000 points to 16,875 in 12 months. But is that enough?

Though growth is back, it’s not yet clear whether the country’s economy is totally out of woods. The global economy still faces risks. Nobody has a clear idea about how much India will be affected if the Eurozone debt crisis spawns another global debt squeeze. The markets still stand vulnerable. And above all, inflation is hanging like a Sword of Damocles over the economy.

India has one of the highest inflation rates among the major economies of the world: Wholesale price-based inflation is close to 10 percent and consumer price inflation is an astronomical 17 percent. In many other countries, inflation is just 0-3 percent.

According to many economists, the government should have given utmost importance to curbing prices as it affects the daily lives of millions of poor Indians. Instead, the second budget of the UPA put more focus on financial discipline. The government cut down fuel and fertiliser subsidies to reduce the fiscal deficit. It increased fuel prices several times to help the oil marketing companies overcome under-recoveries. This was a double blow to the common man who was already hit by high prices.

The Agriculture Minister could not come up with effective steps to tackle prices. Neither could the Finance Minister keep the headline inflation under check. They also failed to keep their promise on tax reforms. It postponed the implementation of the Goods and Services Tax (GST) from April 2010 to next year. Even telecom reforms were moving at snails pace. It was after a long wait, the auction of third generation (3G) airwaves finally took place in May.

Whither roadmap?

It’s true that the government has four more years in office. Ample time to correct wrong policies and initiate new projects. But as the Prime Minister himself said the government could have done more in the first year. Singh expressed hope that inflation would come down to 5-6 percent by December this year. Even the most optimistic economist would say this is an ambitious target. But what options that the government has to tackle inflation is still unclear. Neither the Prime Minister nor his Finance Minister has spoken about it yet, though both claim that inflation would fall.

Singh appeared convinced of what should be done to accelerate inclusive growth. “We have to invest more in infrastructure, take bold steps to remove chronic poverty and increase the productivity and efficiency of our agriculture sector,” he told reporters. Well said. But where is the roadmap? On the first anniversary, the government looks clueless on how to take ahead its inclusive agenda? It should first come up with a roadmap by clearly identifying its thrust areas like the first UPA government did. There has to be a better coordination between the Congress party and the government. And above all, the Prime Minister should lead from the front.